Material not displaying as expected
The problem is because you are trying to use Cycles shaders with the Blender Internal render engine.

Each render engine has its own way of handling materials, and these ways are usually incompatible with one another. Because of this, designing a material in one render engine, and then trying to render it with a different render engine won't work.

You need to make materials in the same render engine that you are going to use.

Switch into Blender Render and create a new material there, and your problem should go away.